Skip to main content

Key terms you need to know before taking out a payday loan

Payday Loans
(Image credit: ShutterStock)

When taking out a payday loan online, it’s important to understand from the start that this type of finance should only ever be used as a last resort, and it’s worth exploring all other forms of raising temporary funds (credit cards, borrowing from relatives, etc) before taking one out. However, should the circumstances dictate that this is the avenue, it pays to be aware of the terms that you’re likely to come across. Here are some of the main ones to look out for.

Annual Percentage Rate (APR)

This is also known as an interest rate, and is the money that it costs to take out a loan. Payday loans usually just have one flat charge to borrow money for two weeks or a month, but it can be worked out as an APR and, when compared to other loans, (mortgages for example) it becomes clear how expensive these loans are. 

Auto Title Loans 

Also known simply as ‘Title Loans’, these are often longer term loans offered by payday loan companies that require customers to put up the title of their vehicle as collateral against the loan. 

Cash Advance/Check Advance

These are synonyms for payday loans and are the exact same concept - money is borrowed against the borrowers’ next paycheck.

Consumer Reporting Agencies 

Organizations that officially keep track of customers who have outstanding payday loans. Payday loan companies usually subscribe to these services so that they don’t issue loans to customers who already have payday loans with another payday loan company.

Credit Check 

Almost all lenders will review a customer’s credit score (an official evaluation of how able a person is to repay a loan). Some payday loan companies do not run a credit check, but they may be more expensive. Repaying a loan on time can sometimes help a customer’s credit score (be sure to check with the lender) and not repaying can affect a credit score detrimentally. Simply applying for a payday loan should not affect a credit score, but again, make sure to ask at the application stage.

Deferred Deposit

Typically, a lender may ask the customer for a deferred deposit at the time that a loan is approved and issued. This usually means that a customer will write a deferred or post-dated check that can be cashed when the loan period comes to an end. 

Direct Payday Lender

Some payday loan companies are merely brokers for other lenders, and they sell off loans to the most competitive bidder. Other companies loan out the money themselves and are known as Direct Payday Lenders. In general, it is best to deal with direct payday lenders - the customer service will be more coherent, and less people are involved in the transaction. Direct Payday Lenders also tend to be more reputable in general. 

Long Term Payday Loans

Some lenders go beyond the usual two weeks/one month loan periods that are the industry standard for payday loan companies. At first glance, the terms of Long Term Payday Loans may look attractive - the payments are spread out over a much longer period of time (sometimes years) and the repayment chunks look much smaller. However, if the figures are analysed in any detail, it is clear that this is an even more expensive way to borrow money, and the APRs involved can reach astronomical levels. To be avoided. 

Maturity date

This is simply when the loan is due to be repaid in full. In the payday loans industry, this is usually set to coincide with the customer’s next pay check, typically a two-week or one-month term. 

Maximum Amount

Although this is fairly obviously the most that a lender will issue to a customer, the factors behind it are less up front. For starters, payday loans in each state are subject to very different levels of legislation and many states impose a much lower maximum amount than others, so not every offer on a payday lender’s website will be available to every US-based customer. In addition to this, a customer’s personal circumstances will have a large bearing on the maximum amount that they can borrow. First time applicants, people with lower credit scores or with less money coming in will all likely be able to borrow less money than the theoretical maximum allowed. 

Payday Fee

This is usually a relatively small admin fee that must be paid by the customer either as the loan is taken out or on the prepayment date. 

Principal

This is the amount being borrowed, outside of fees and interest. Payday loan principals tend to be lower than other types of loan, but as we’ve seen, are subject to much higher rates of intere

Uniform Small Loan Law (USLL) 

These are state-specific laws that have been set up to protect consumers from excessively risky loans. They legally control how high an APR a loan can have and the maximum level of money a payday loan lender can give.

Wage Garnishment

This is a term that refers to any amount of money that is legally taken from an individual’s paycheck, as decreed by a court. If a repayment is missed and court proceedings are arrived at following a payday loan, then a court can rule that money be taken out of a person’s paycheck so that some money is legally going to the lender every two weeks or every mont